Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Former APAC CEO of Saxo
Global stock markets are reacting poorly to rising interest rates around the world as May has seen a continuation of the sell-off in stocks and bonds which started in early January.
So far this year US stocks have fallen close to 20 percent as measured by the S&P 500 index, with the Nasdaq Tech index dropping an even larger 30 percent. The picture is no better in Asia with both Hong Kong and China down around 18 percent since the start of the year and 38 percent from the post-Covid highs set in Q1 2021.
In Singapore, there are two indexes, with MSCI Singapore performing similarly to Hong Kong and China, with the Straits Times Index the best performer, up 1 percent year-to-date. Bonds have not been a great hedge at this stage, as rising interest rates have been the catalyst for stocks selling off.
Investing mentality through the current market conditions
So, what should a long-term investor do, when saving for their goals and aspirations? In the words of American economist Benjamin Graham, “The essence of investment management is the management of risks, not the management of returns”.
Indeed, the first thing to do is not to panic and sell everything. Market downturns can be very hard to cope with psychologically. It takes some time for investors to recognise that any move is more than just a pullback. That’s why stocks go down in fits and starts, rather than a straight line.
Different investors come to this realisation at different times. Those who may have been early on the move, may start to consider buying back once the market has moved a certain distance. An understanding of your own investing psychology is a most important tool when constructing your personal portfolio and managing risks.
Some investors are happy to take on investment risk, reassured that in the long run the stock market will recover, which suits their long-term investment horizon. Other, more cautious investors may consider a 20 percent drop in the value of their portfolio to be catastrophic. These investors may have loss aversion, fearing losses and feeling the pain of losses more than they enjoy gains.
For your own long-term financial health, it’s vital to understand which type of investor you are, risk averse, loss averse, risk taking, long-term. And to set your portfolio at the right risk level to ensure you don’t panic at the worst possible time, sell out and realise large losses only to jump back into the market once the gains from any rebound are in the rear-view mirror.
Time in the market is better than timing the market
Additionally, downturns in stock and bond prices – like we are seeing now – create opportunities to invest at much better prices than were available only a few months ago. Investors shouldn’t try to ‘time’ when they make those investments but spread their investments out over regular time intervals.
This process is commonly referred to as dollar cost averaging and is universally recognised as an excellent way to build portfolios, particularly when stock prices are more volatile. Remembering Warren Buffet’s words here, “Be fearful when others are greedy. Be greedy when others are fearful”, this allows you to be greedy during fearful times without having to worry about picking the bottom of the market.
The reality is that most gains in a portfolio come from the asset allocation – the mix of stocks and bonds – and not necessarily picking the winners in a selection of individual stocks. A portfolio of mostly stocks is generally riskier, while bonds are generally less risky. The recent drop in both bonds and stocks is an extremely rare occurrence. Such events never last for a long time as market dynamics will kick in and return order to the relationship between stocks and bonds.
It’s very difficult to find the optimal mix of stocks and bonds for your risk appetite and stage in life. Only investors with the time and knowledge to do so should try to construct and maintain their own asset allocation. Most people with sufficient wealth talk to their bank or independent financial advisor to help them to invest.
Fully digital, actively managed investments, tailored for the individual
From research, we know there are many investors in Singapore who are looking for sophisticated investing support yet are being priced out of private wealth management services. SaxoWealthCare is designed to serve this emerging affluent segment with growing income, aspirations and life goals, as the first digital advisor in Singapore that can create truly individualised portfolios, unique to their profile and goals.
All investors have to do is answer a few questions about how they feel about risk and input a few goals, and a portfolio will be customised for them – a portfolio which is unique to their combination of goals, the priority of those goals, their risk appetite and loss aversion. Investors get a dynamic asset allocation which reduces risk in bad markets and increases it when the markets turn good again, so they can keep calm and carry on.
This may look like other robo-advisers out there but under the hood, investors get a truly customised and tailored portfolio, actively managed to best achieve their goals with downside protection if required; right now, no one else is doing this anywhere. Finding the right, actively managed solution, is critical in the journey, as more people look to grow and protect their wealth in these volatile and uncertain times.